Perspectives - Personal Finance Blog

Gabby says:

Every day we hear more and more about the sub prime mess.

At first it was said that it would just affect America, and that a quick recovery could be made.

Then there was a brief mess in the UK, with institutions such as Northern Rock being quickly eaten up by the crisis.

Then there was talk that it was all over. The credit crunch was dead. Past. On the road to correction.

And now it seems that this is clearly not the case at all. It is spreading Internationally and its bite is still to be felt by many.

When you look at the facts you can see that in the US 17.9 million homes were without residents in the third quarter of 2007. Never before have so many homes stood empty.

“According to Congressional estimates, up to 2 million families are expected to lose their homes over the next two years.” That’s on top of the 1.7 million foreclosures so far in 2007. 1

In Australia there is growing concern amongst many people about our ability to deal with debt - especially with mortgage defaults having soared by 329% since 2005. General credit defaults and interest rates are on the rise as well. In many respects it’s a disturbing trend, but it’s not as doom-and-gloom as the media puts it.

No matter how things transpire there are always options, and now that there’s a pretty good chance of a downturn on the horizon, now is a good time to start considering your options.

If there is economic bad weather on the horizon, what measures can you take now, in order to protect yourself when the storm hits?

The most obvious ones to me are to reduce debt and increase saving - and of course there are many more.
I’d love to hear your suggestions!

PS. Don’t forget to check out our new article “Inflation Returns” : No matter where you live, world wide inflationary pressures are back! And it requires different approaches to everything to do with money - including wage contracts, borrowing for whatever purpose and any form of investment.

Linda says:

The stock markets may have recovered from the credit crunch but the majority of analysts expect that the housing market in the US is not going to recover for quite a while. 150 mortgage companies have closed and the number of unsold homes is at a 7 year high. In the UK, where house prices are even higher, a fall in housing prices is forecast.

Obviously, anyone who has worked hard to own their own home wants to see its value rise, not fall. I am writing from Australia, where we have not yet had much of a price fall, but the number of mortgages being entered into is decreasing and some non-bank lenders are having trouble raising money. If the lenders have less money to lend, then fewer people are going to be able to buy houses.

This is an issue that affects both buyers and sellers.
Housing affordability is a huge election issue here, with many younger people feeling totally priced out of the housing market. Excess levels of debt are also a major issue with interest rates in Australia forecast to rise… Do you have a mortgage that would be affected by a rate increase or are you a first home buyer who is worried about affordability?
We would love to hear your perspective!

Back in the US, while current officials are saying calming words, Mr Alan Greenspan, the formed Federal Reserve chairman is not so reserved. Busily promoting his new book across the globe, he has admitted that he would not be surprised if housing prices fell by double digits into 2008.

House prices, mortgages and levels of debt are a world-wide problem. Read the article in which some of my ideas are included in Mortgage Woes - What to do?

We’d love to hear how you think these issues will affect you.

Gabby says:

Ahhhhhhh, feel that property squeeze.

It’s all over the news here (and probably where you are also), property markets are hotting up. This includes both sales and rentals. You could be excused for thinking that everyone had gone a bit property-mad.

Here in Australia we’re in the middle of a boom, but despite these supposedly prosperous times there are many people who aren’t feeling that well-off at all. They’re feeling stretched and increasingly unhappy in their situations.

Sure, this could be argued to be a general trend in our society - and maybe it is - but had you ever thought that renting could be a cause of anxiety and depression for many people?

No? Well neither had I. I suppose I had never given it much thought.

According to this article as many as “89 per cent of renters reported experiencing negative psychological effects directly related to the rental climate.”

Basically, in the current rental market people are becoming so anxious about having to move and look for a new place that they will stay living in sub-standard conditions. But if the constant horror-stories in the news are anything to go by this anxiety is not completely unjustified. Only last week did I read about one unit in Sydney where over 100 people queued outside waiting to inspect the flat. And only last week did I experience one of these busy inspections for myself…

In my last post I mentioned that I was in the rental market again. Yes, I’m a renter.

I’ve been living at my current address for about 4 years, but they want to renovate and consequently I have to find a new place. The search, so far, has been less than inspiring. You just can’t get the same ‘bang for your buck’ that you used to be able to.

Some people might ask me:

“Well, if it is so bad then why don’t you just go out and BUY a place?”

And whilst I might like to there are a couple of reasons as to why buying a house is not currently an option:

1. The Deposit
   At the grand old age of 23 I’m not quite there yet.

   I’ve got a reasonable chunk of it, but it’s still a far cry from the 20% deposit that I want.

   In Australia the usual minimum deposit on a home is 10%, but in recent years some lenders have started offering no-deposit loans, where they lend you 100% of the total cost. Whilst no-deposit loans seem to be gaining popularity it is not an option that I would choose, just because I would feel uncomfortable having borrowed the entire amount.

   I have some ideas about how I might be able to get this deposit together, and will devote some attention to them, here in the future.

2. The Loan
   I’m primarily self-employed, which by itself precludes me from many standard home loans. Instead of a standard home loan (mortgage) I would typically have to take out a low-documentation (or low-doc) loan.

   With a low-doc loan I would have to self-assess my income and provide whatever documentation I had on hand. The more documentation I could provide, the lower the (extra) interest rates and fees that I would have to pay could be.

   But no matter how much documentation I provided lenders would not be able to run the same sort of checks on me, for example calling up my employer to confirm that I am in fact employed and earning a set amount.

   The result of not being able to perform these checks means that I would pay a higher interest rate, additional fees & charges, and be subject to other conditions not normally placed on those with a ’standard’ loan. The idea behind this is that because I am self-employed I am ‘high risk’, which may suck but c’est la vie, I love my job.

   Low-doc loans are also becoming more expensive in the wake of the Subprime crisis in the US.

   There are some other good financial issues here that I’ll get to in a future post…

3. Situation
   Last, but not least, comes my situation.

   At this point in my life renting suits me.

   Renting sensibly allows me to save money for that larger deposit, and generally suits my lifestyle.

   Whilst owning a home is an eventual (and possible) dream, I don’t know where the next couple of years may take me. I’m not willing to sacrifice any of the exciting opportunities that may present themselves for the sake of getting into the property market as soon as possible.

   Buying a house is a big commitment and in a years time I may want to move elsewhere - without having to worry about what I will need to do with my house.

   There are some other good financial issues on this that I will get to in a future post.

   When it comes down to it I have an entire lifetime to find and enjoy my first home, and whilst I don’t know when I’ll buy it yet there is nothing to stop me from preparing for that day - if nothing else I will have some savings to ease my anxious, renter’s mind.

Linda says:

I believe we are now seeing “the morning after” of what has been not just risky lending for housing, but a generalized global credit party. Most of the headlines have concerned foreclosure on unfortunate homeowners, falling property prices in parts of America, risky lenders closing their doors and (in the UK) an old fashioned run on a bank.

Certain financial institutions have an obvious bad hangover, from slick operators on Wall Street to central bankers suddenly watchful for bad lending practices. But aggressive lending and lax credit standards have not been confined to the mortgage markets. As well as money being lent on inadequate income to householders, there has been a proliferation of other types of imprudent lending. The world has been awash in money looking for a home and a good return.

The hedge funds, no matter what their strategy has been are usually highly leveraged. Some of these have already closed to redemptions and others are yet to reveal their losses. Many pension funds have dabbled in “alternative” investments such as hedge funds so the losses will not be confined to the wealthy.

One of the reasons that all sorts of assets fell in value when the subprime crisis first hit, was that entities who owned the dodgy mortgages were trying to raise some cash. Since no one was prepared to buy the mortgages, at a reasonable valuation, stocks, commodities and anything else that could be easily sold was sold to improve liquidity.

Private equity groups have also been busy financing all manner of merger and acquisition deals. There was such pressure to participate in such activity that many banks dropped their usual conditions, just to do the deal. There was a high appetite for risk and some deals appeared to pay huge bonuses to the participants with doubtful long term returns to shareholders.

With a change in the availability of money at cheap rates, the party seems, at least temporarily to be over. A desire for gain has been replaced by fear of loss. The media is full of institutions, politicians and central bankers trying to calm a skeptical public that the situation is under control. Or find some convenient scapegoat for revealed problems.

For more on this topic read the articles:

• Why Shonky Loans in Florida and Las Vegas now can affect you - no matter where you are in the world!
• Subprime Loans, the US Dollar and the Oil Price
• The Return of the Economic Cycle
• Wreckage From US Mortgage Crisis Reaches Australian Shores

Wreckage from the US mortgage crisis now appears to have reached British shores as well. UK politicians may be blaming the Yanks, for the fact that the Bank of England has had to step in and bail out Northern Rock.

However, the organisation has not been lending in the US. Before its current problems Northern Rock was growing rapidly, but dependent on wholesale markets for its money. Its own aggressive lending in the UK is at the root of its problems, combined with the global credit crunch.

Gabby says:

“No one can say that we don’t live in interesting times, and judging by both my own personal experience and the news stories day in, day out things are very interesting in the current world of personal finance.

I find the fallout from this subprime mess in the US a little worrying, and for a few good reasons:

1. It’s spreading worldwide
2. It looks set to take its toll on property and the availability of, and the cost of credit.

We can see this starting to happen already.

On the one hand I am thankful that I haven’t gone out and taken on a house and a big mortgage. At this stage in my life I don’t know if it’s wise, but more to the point the two groups being hit the most by the subprime fallout are banks (lenders) and new property buyers (borrowers). I’m thankful to not be in either of those groups right now…

Several of my friends have gone out and bought big, perhaps bigger than they should have, and not at low prices. The cost of housing has increased dramatically here in the past couple of years, and in many cases the increases seem almost ridiculous. But people pay them, and even more people are becoming willing to pay them - out of fear that if they don’t buy now they may be priced out of the market forever.

Personally, I don’t think that fear, rising prices and uncertainty about economic sustainability and interest rates are good reasons to rush out and buy a house - it’s just as easy to lose money with property as it is to make it, perhaps even easier. But I do worry about the overall affordability of housing, and the relationship between what’s going on in the land of property sales and how that relates to me as someone that rents.

Suppose rent is a very relevant issue to me, as I’ve recently been given notice to move. But I will talk about that more some other time…“

Linda says:

 

“ A change in attitude to credit risk and lending is sweeping the world. Aggressive lending for housing has not just happened in America; it has been a phenomenon in many countries.

While some have bought just to put a roof over their heads, many properties have been bought for pure speculation (and the rental return is too low to have justified the purchase).

I feel the gradual unwinding of this phenomenon is likely to affect many individuals and industries in different ways. The effects will extend beyond the obvious parties such as mortgage companies, real estate agents and the construction groups. The biggest risk to the overall economy is from a fall in general confidence, a perception of decreased wealth and a fall in the willingness to spend.

You can see that, in the UK at least, people are losing confidence in their banks - and in the case of Northern Rock customers this has meant getting their money out of there as soon as possible.

Many houses I see now are larger and more ostentatious (the McMansion) than they would have been otherwise, simply to maximise the effects of price appreciation. While having a beautiful home is in itself an enjoyable experience, being saddled with a huge mortgage and hefty repayments is not!

I believe the joys of home ownership will rapidly evaporate if property prices go into reverse, courtesy of the global credit crunch.“